GFI says some of its brokers may be defecting

Firm says its top credit derivatives broker in North America resigns

AlistairBarr

SAN FRANCISCO (MarketWatch) -- GFI Group, a leading credit derivatives brokerage firm, said on Friday that a rival company is trying to poach some of its top traders.

GFI shares slumped 17% on concern the firm will lose revenue if brokers defect or will have to pay big bonuses to keep talent.

Donald Fewer, head of GFI's North American Credit Product brokerage business, resigned, the company reported.

"GFI believes that Mr. Fewer's departure is part of a concerted effort by one of its competitors to raid GFI's highly successful North American credit product brokerage business by hiring members of GFI's New York credit brokerage staff," it explained.

Citigroup analyst Donald Fandetti said Fewer joined Compagnie Financière Tradition (CFT), a Swiss brokerage firm, after more than a decade at GFI.

Roughly 24 of GFI's North American credit brokers may be defecting to a competitor, GFI
GFIG
added, noting that these employees generated about $50 million of the company's $970 million revenue.

"Raids of key brokerage personnel are common in the inter-dealer broker market but this would be significant as GFI is a market leader in this product area," Niamh Alexander, an analyst at Keefe, Bruyette & Woods, wrote in a note to investors.

GFI stressed that Fewer and others have contractual obligations that prevent them from soliciting employees and unlawful competition. The brokerage firm said it will "respond aggressively" and defend its contractual and legal rights.

"GFI is in discussions with its credit brokers to retain staff but we expect some will leave," KBW's Alexander wrote. "Keeping staff would cost GFI in the form of retention bonuses. It is therefore too early to estimate the potential earnings impact."

GFI also said first-quarter earnings will likely come in at 28 cents a share or more and brokerage revenue will grow 25% to 30% in the period, in line with a previous forecast.

GFI is expected to make 28 cents a share in the period, according to nine analysts in a Thomson Financial survey.

GFI shares fell 24% to close at $11.93 on Friday, leaving the stock down 50% so far this year.

Some analysts said that drop already reflects the impact of lost talent and worries about lower trading activity in credit derivatives markets.

Fewer traders would mean less revenue for GFI, but defections would also reduce costs, Rob Rutsohow, an analyst at Deutsche Bank, said, noting the firm spends 63% of its sales on personnel.

Citigroup's Fandetti noted that GFI is very careful to stagger employment contracts with top traders, so that they can't all leave at once. The firm could also "turn the tables" on competitors and recruit talent from them, he added.

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